Reading 56: An Introduction to Security Valuation- LOS c(

price, points, discount, interpret, currently

LOS c, (Part 1): Calculate and interpret the value of a preferred stock using the dividend discount model (DDM).

Q1. A preferred stock’s dividend is $5 and the firm’s bonds currently yield 6.25%. The preferred shares are priced to yield 75 basis points below the bond yield. The price of the preferred is closest to:

A) $5.00.

B) $90.91.

C) $80.00.

Q2. Assuming a discount rate of 15%, a preferred stock with a perpetual dividend of $10 is valued at approximately:

A) $1.50.

B) $66.67.

C) $8.70.

Q3. Calculate the value of a preferred stock that pays an annual dividend of $5.50 if the current market yield on AAA rated preferred stock is 75 basis points above the current T-Bond rate of 7%.

A) $42.63.

B) $70.97.

C) $78.57.

Q4. A company has 8 percent preferred stock outstanding with a par value of $100. The required return on the preferred is 5 percent. What is the value of the preferred stock?

A) $160.00.

B) $152.81.

C) $100.00.

Q5. If a preferred stock that pays a $11.50 dividend is trading at $88.46, what is the market’s required rate of return for this security?

A) 13.00%.

B) 11.76%.

C) 7.69%.

Q6. A company has 6 percent preferred stock outstanding with a par value of $100. The required return on the preferred is 8 percent. What is the value of the preferred stock?

A) $92.59.

B) $75.00.

C) $100.00.

Q7. What is the value of a preferred stock that is expected to pay a $5.00 annual dividend per year forever if similar risk securities are now yielding 8 percent?

A) $62.50.

B) $40.00.

C) $60.00.

Q8. The preferred stock of the Delco Investments Company has a par value of $150 and a dividend of $11.50. A shareholder’s required return on this stock is 14%. What is the maximum price he would pay?

A) $150.00.

B) $82.14.

C) $54.76.